Intel Stock Is Selling Off. Here’s Why You Should Buy.

Intel’s
stock has been trading cheaply relative to its earnings, and now investors know why. Global growth is slowing, U.S. trade with China has turned chilly, and Intel’s data-center customers are sitting on a glut of chips left over from a buying rush last year. On Thursday evening, the company reported fourth-quarter results that came in a bit below expectations and, more importantly, issued sour 2019 guidance.

Shares tumbled 5% on Friday, to about $47. Intel (ticker: INTC) predicts that it will earn $4.60 a share this year, barely changed from last year, on a 1% rise in revenue. That puts the stock at 10 times forward earnings, down from 14 times a year ago. It raises two questions investors could find themselves often asking this year. Is this stock close to the bottom? And if growth is slowing, is it better to hold cheap but cyclically challenged companies or pricey ones with few worries?

To the first question, Intel looks like a good value for long-term investors, although it isn’t difficult to imagine it sinking lower in the months ahead. Just look at the long slump for the stock that ended around mid-2013. This was when smartphones went from popular to ubiquitous, and investors predicted the death of personal computers. Intel often traded at 10 times earnings during that period and briefly fell to eight times in 2011.

PCs today are diminished but not dead; demand for them actually grew in two quarters last year after six years of declines. More important for Intel, the spread of smartphones, where it is relatively weak, has brought a boom in data centers and servers, where it is dominant. Server chips can sell for 20 times the price of smartphone processors. In June 2013, with Intel stock at $24, Barron’s predicted a five-year doubling. Five years later, it closed at $57.

There is little to dislike about Intel’s financial performance last year. Revenue rose 13%, to $70.8 billion. Adjusted earnings were up 28%, to $21.5 billion—the growth rate ignores the effect of a big tax charge for repatriated earnings in late 2017. And earnings per share increased 32%, to $4.58. PC-centric revenue for the year grew 9% and made up barely half of total revenue, while the rest came from data-centric revenue, which includes server chips, and which grew 20%.

But those numbers make the 2019 guidance even more of a comedown. How can growth go from fierce to flat so quickly? Among the biggest culprits is data-center revenue, where Intel saw 45% growth in the first three quarters of 2018, followed by a fourth-quarter slowdown. Management attributed the dip to customers putting chips to work from their inventories.

With those inventories still looking full, management is predicting overall data-center revenue to decline by a mid-single digit percentage in the first quarter, but to rise for the year, implying a second-half recovery. Newly launched server chips should help.

Near term, the broader cloud market is holding up well. J.P. Morgan analyst Harlan Sur predicts that capital spending at hyperscale data centers will grow at a midteens percentage this year. Intel’s guidance could be conservative. Over the past three years, it has beaten its own earnings forecasts by 14% on average, according to FactSet. Long term, Intel stands to pick up more business from its exposure to burgeoning fields, like 5G wireless service, self-driving cars, and the so-called Internet of Things, where previously dumb machines are brought online and made to share and use data.

All that’s needed for investors in the meantime is for Intel to protect its dominance in computer chips, especially for servers. The bear case on that was spelled out on Friday by Susquehanna Financial Group analyst Christopher Rolland in a note downgrading Intel to Neutral from Positive—one of a cluster of downgrades. Moore’s Law once called for a doubling of transistor density on computer chips every 18 months, but when Intel later this year drops down to something called a 10-nanometer technology node—smaller is denser—it will have spent almost five years making chips at 14 nm.

One thing that favors Intel is the estimated $13.7 billion it’s expected to spend this year on research and development, or about nine times AMD’s spending. And the industry leader has plenty more financial firepower than that. Management estimates that free cash flow will rise 12% this year to $16 billion. Last year, the company spent about twice as much on share repurchases as on dividends. Big decisions on capital deployment might have to wait for Intel to finish its chief executive search. Its former chief was ousted last year over an “inappropriate” relationship with an employee.

Buying Intel stock so soon after its bad earnings news carries risk. But that comes to our second question: whether it’s better to buy a worry-free company. For an example of one of those, look far outside of semiconductors, or even tech, to staples—say, french fries.
Lamb Weston Holdings
(LW) is a market leader in them. Even market doomsayers aren’t predicting a downturn in fries. And Europe is coming off a bad potato crop, which is likely to cut into fry production and raise prices, just as Lamb is firing up new factory capacity. That bodes well for Lamb’s exports and earnings growth, but financial comfort food is expensive. The stock goes for 22 times forward earnings projections. We’d sooner grab some Intel at less than half that price and wait out an unappetizing couple of quarters.

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